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2 Overview Defining Human Capital The Importance of Human CapitalRates of Return for Various Education LevelsThe Effects of Human Capital on the EconomyMeasuring Human CapitalPolicies for Enhancing Human CapitalImplications for US policy

3 Defining Human Capital (HC)Human Capital = the sum total of skills within an individualNot just natural skills, but those acquired through specialized training and education

4 The Importance of Developing Human CapitalProductivity is the efficiency with which we convert inputs into outputs – technology, skillsGlobalization and Structural Changes have increased pressure on low-skilled workersOptions are:Ignore globalizationCut wagesAccept higher unemploymentInvest in Human Capital

5 Rates of Return for Various Education LevelsPoverty rate is twelve times higher for high school dropouts than for college graduatesIn 1980’s, college grad made 40% more than a high school grad, today its 80% moreFor every additional year of education beyond HS, income increases by ~10%

6 The Effects of HC on the EconomyIncrease the rate of growth of Human CapitalIncreased GDP

7 The Effects of HC on the EconomyIncrease the rate of growth of Human CapitalIncreased GDPIncreased Freedom

8 The Effects of HC on the EconomyIncrease the rate of growth of Human CapitalIncreased GDPIncreased FreedomIncreased Research and Development = Increased InnovationHow do you Measure HC Development?

9 Measuring Human CapitalYears of EducationAvg. years of education; 25-64Assumes same quality in each countryTreats all degrees the same10% increase in HC =9% increase in GDP per capitaIn US, 9% increase in GDP per 1.3 years

10 Measuring Human CapitalAttainment RatesCompares the Present with the Past

12 Policies for Enhancing HCDeveloping Human Capital starts at the youngest age possibleSpending should focus on Kindergarten – HSImprove aid, grants and tax codes to make higher education affordableAdam Smith saw two roles for the governmentSupport institutions facilitating commerceSupport educational institutionsEqual educational opportunities is more sustainable than transferring money from the rich to the poor

13 Implications for US PolicyThis a long term investment, beyond two terms in officeIn times like these, it is an expense America can get behind

14 Final Thoughts“Investment in education pays the best interest” - Benjamin Franklin “The most valuable of all capital is that invested in human beings” – Alfred Marshall

15 Summary Defining Human Capital The Importance of Human CapitalRates of Return for Various Education LevelsThe Effects of Human Capital on the EconomyMeasuring Human CapitalPolicies for Enhancing Human CapitalImplications for US policy